The pathology of Pulmonary Hypoplasia (PH) includes reduced lung mass, insufficient ability of the lungs to stay expanded due to a deficiency in surfactant protein production, a poorly differentiated lining of the air sac (alveolar epithelium), and a reduction of gas exchange. Our long term goal is to alleviate neonatal PH using stem cell therapy to augment premature lung tissue with in vitro stem cell derived distal airway cells. The specific hypothesis is that recapitulation of key developmental events by providing transcription and growth factors will optimize derivation of distal airway cells. This includes a 2 step process with derivation of definitive endoderm followed by differentiation into distal airway cells. Furthermore, providing a 3-dimensional scaffold will enhance our yield of distal airway cells by providing important spatial cues. In the lung, distal airway development and integrity is essential for proper gas exchange, surfactant production and survival. The focus of this grant proposal is to explore methods of deriving distal airway cells from embryonic stem cells. Our specific aims include: 1: Optimize derivation of definitive endoderm cells from murine embryonic stem cells, specifically by manipulating the Wnt and nodal pathway or by providing small molecules. 2: Optimize derivation of distal airway cells through growth factor supplementation, specifically FGF2, 7,10. 3: Optimize spatial cues utilizing 3-dimensional hydrogel scaffolds with potential transplantation in vivo, time permitting.